Travelers dry as banks take a bath

How handy to have an umbrella.

Last year, the Travelers Companies bought back its old logo -- the red umbrella -- from its former corporate parent Citigroup. The timing was fortuitous, at least, in symbolic terms.

As if the skies opened up with a downpour, financial firms across the globe have been pelted with problems -- a shower of investment failures, market setbacks and, in the insurance industry, price wars.

While Manhattan's money-center banks got drenched with billions in losses, St. Paul-based Travelers stayed high and dry. Its operating income hit $4.5 billion last year, a gain of 14 percent over 2006.

What's more, Travelers' balance sheet has been nearly unscathed by the meltdown in the subprime mortgage markets, largely by holding only negligible amounts of subprime securities (less than $290 million in a $75 billion investment portfolio) or commercial mortgage-backed securities ($935 million at year-end).

Premiums, not investment returns, are the key to Travelers' profits. Net realized investment gains, after tax, last year came to $101 million. Premiums delivered 45 times as much to profit.

To protect against underwriting losses, Travelers has built up massive reserves to cover catastrophic insurance claims from the likes of fires, earthquakes and hurricanes. To the eyes of one analyst, Travelers could withstand some of the worst imaginable hits from natural disasters and emerge showing few scars.

In the event of a hurricane of a size that's likely to come along only four times in 1,000 years, Travelers likely would remain profitable, said Brian Meredith, an analyst at UBS Investment Research.

In a show of financial well-being, by the end of 2007 Travelers had repurchased $4.1 billion in outstanding stock and announced plans to repurchase nearly $6 billion more.

While many financial companies have offered alibis and apologies for 2007 results, Travelers entered 2008 boasting and with Chief Executive Jay Fishman, paid $9.8 million last year, counting his rewards.

Travelers, in a report earlier this year, noted that its return to shareholders came to nearly 47 percent from early 2004 -- when Travelers merged with the St. Paul Companies -- to the end of 2007.

Only three companies in its peer group -- Goldman Sachs, Chubb and ACE -- exceeded that performance. Companies such as Progressive Wachovia, American International, XL Capital and Citigroup -- all posted investor losses over the same period.

Split opinions on 2008

But analysts see more insurance industry storms ahead and are mixed about whether 2008 will be as good a year for Travelers as 2007.

Citigroup insurance analyst Joshua Shanker in January lowered his estimated Travelers earnings for this year to $5.65 a share -- down 20 cents from his previous estimate and below actual profits of $6.86 a share last year. He cited pressure on premiums in the face of increased insurance-company competition. "We note the tone of recent conference calls appears to acknowledge that industry headwinds are indeed negatively impacting results," he said.

Bear Stearns analyst David Small reached a similar conclusion on Travelers.

In light of "an insurance cycle that is likely to get meaningfully worse in 2008," Small expects Travelers earnings for this year to be $5.92 a share. He expects the stock to perform no better than its peer group in 2008. In contrast, analysts at UBS Investment Research and Morgan Stanley recently have written upbeat appraisals of Travelers' 2008 prospects. "Positives are being overlooked ... and risks appear overstated," said William Wilt, insurance analyst at Morgan Stanley.

Said Meredith, at UBS: "Travelers is an excellent company. It's got an absolutely top-quality balance sheet." It also has an uncommon virtue for investors among financial companies these days, in Meredith's view: "You can sleep well at night with it."

Meredith looks for Travelers' stock price to hit $62 this year. Lately it has traded in the high $40s.

While management surely deserves credit for avoiding a financial soaking in recent quarters, so does something that's getting a lot of rethinking elsewhere in the financial services industry: government regulation and ratings company oversight.

"Insurance companies are not typically invested in any of the securities that were put at risk because of the decline of the mortgage market," said Andrew Whitman, insurance expert at the University of Minnesota's Carlson School of Management.

To satisfy regulators, insurers have to boost their capital reserves to buy risky investments, something most insurers have been loath to do.

Still, even the optimists worry about the risks of continuing declines in premiums. For instance, in fourth quarter 2007, commercial insurance premiums fell 5 percent on renewal policies.

"A more pronounced competitive-pricing environment could cause top-line results to fall below expectations and also result in a faster erosion of underwriting margins," Thomas Cholnoky, Goldman Sachs insurance analyst, wrote last month.

Travelers had better hold onto that umbrella.

Mike Meyers • 612-673-1746